Table 2. Contributions to Net Income by Line of Business for FRS Companies, 1992-1993 (Million Dollars) aThe total amount of unusual items was -$13,307 million and -$2,153 million in 1992 and 1993, respectively. Note: In petroleum, sum of components may not equal total due to nontraceables and eliminations. Table 3. Rates of Return by Line of Business for FRS Companies, 1986-1993 Note: Rate of return measured as contribution to net income/net investment in place. In 1993, the nonenergy line of business ranked third, after refining/marketing, as a source of FRS earnings. Among the many FRS businesses outside energy, chemicals are by far the most important. Sixteen FRS companies had chemical operations with revenues that totaled $62 billion in 1993 (Figure 4).14 Income from these operations fell sharply after peaking in 1988-1989, in part due to a reduced pace of economic activity in industrialized countries and in part due to an excess of chemical production capacity built in response to soaring profits. Chemical earnings in 1993 were nearly unchanged from 1992 (Table 4) with both revenues and operating expenses declining by $1.4 billion (Figure 4). Although the FRS companies' chemical earnings appear to have stabilized in recent years, they still amounted to only about a third of the peak levels attained in 19881989. Operating earnings from the balance of the FRS companies' other businesses outside energy also held steady, at slightly over $1 billion, between 1992 and 1993 (Table 4). Restructuring among the FRS companies in 1993 continued to emphasize consolidation of ongoing businesses to attain greater operating efficiencies and lower costs. Unlike 1991 and 1992, when restructuring efforts included the exit of six FRS companies in whole or large part from the U.S. coal industry, no line of business was wholly abandoned in 1993. In the United States, the FRS companies sold more oil and gas reserves than they purchased for the fourth consecutive year, a pattern unknown before the 1990's. Abroad, the Table 4. Operating Income in Chemicals and Other Nonenergy Segments for FRS Companies, 1992-1993 (Million Dollars) Sources: Energy Information Administration, Form EIA-28, except for chemicals segment operating income which was compiled from company annual reports to shareholders. "For FRS purposes, separate reporting of income for chemical and other nonenergy segments was discontinued beginning with the 1987 reporting year. However, the disclosures of chemical segment revenues and operating income made by the FRS companies in their annual reports to shareholders closely track, in the aggregate, the comparable disclosures in the Form EIA-28 from 1981 through 1986. Thus, the public disclosures of chemical segment revenue and operating income were utilized for 1987 through 1993. Revenues and operating income for the other nonenergy segment after the 1986 reporting year were obtained by subtracting the publicly disclosed chemical segment values from the nonenergy line-of-business values reported on Form EIA-28. It should be noted that the results for chemicals are qualitatively unchanged if DuPont, the largest FRS chemical producer, is excluded. 15Energy Information Administration, Petroleum Supply Annual 1993, Volume 1, DOE/EIA-0340(93)/1 (Washington, DC, June 1994), P. 122. continued to be subject to consolidation along geographic lines. For example, Ashland sold 51 retail gasoline outlets in Florida to Shell Oil and Chevron, while BP America and Unocal divested national truckstop networks.16 Three FRS companies made large divestitures in the nonenergy area. BP America sold its nutrition business (e.g., Purina Mills); Chevron sold its Ortho lawn and garden division to Monsanto, and DuPont sold its acrylics business, its electronic connectors business, and Remington Arms Company.' Employment reductions have been a key element in restructuring by the FRS companies. In 1993, the companies employed 699,000 people, about half the number employed a decade ago (Figure 5). Cash Flow Improvement 17 The FRS companies' cash flow from operations 18 in 1993, at $50.2 billion (Table 5), reached the secondhighest level since the oil price collapse of 1986, Table 5. Line-of-Business Contributions to Pretax Cash Flow for FRS Companies, 1992-1993 (Billion Dollars) aDefined as the sum of operating income, depreciation, depletion, and amortization, and dry hole expense. Excludes unusual items. Not meaningful. Note: Sum of components may not equal total due to independent rounding. Percent changes were calculated from unrounded data. Source: Energy Information Administration, Form EIA-28. 16 Ashland Oil, Inc., 1993 Annual Report; British Petroleum Company p.l.c., BP Annual Report and Accounts 1993; Unocal Corporation, 1993 Annual Report. "British Petroleum Company p.l.c., BP Annual Report and Accounts 1993; Chevron Corporation, 1993 Annual Report; DuPont, 1993 Annual Report. 18 Cash is defined as currency, demand deposits, and interest-bearing assets of less than 30 days maturity. Generally, cash flow from operations is computed by adding to (subtracting from) net income those cost (revenue) items that did not actually involve an outlay (receipt) of cash. The largest of these non-cash items is the cost of depreciation, depletion, and amortization. Also, outlays (receipts) of cash that were recognized as non-cash items in previous income statements (e.g., provisions for a legal settlement taken as a charge against income in a previous year but not actually paid until the current year) are subtracted from (added to) net income in computing cash flow. Lastly, changes in working capital (excluding cash) due to operations are subtracted. exceeded only by the cash flow generated in the context of the war-induced oil price escalation in 1990. Overall, cash flow from operations was up $5.4 billion between 1992 and 1993. Line-of-business contributions to cash flow (before taxes) followed the pattern of contributions to income in 1993. Improved cash flow from downstream petroleum, up $5 billion from 1992, more than offset the drop in upstream cash flow stemming from lower oil prices, while improved results in chemicals and other nonenergy businesses contributed modestly. On balance, the bulk of the improvement in cash flow came from developments below the operating income line. Lower current income taxes, down $1.4 billion, reflected reduced income tax rates abroad and increased tax credits related to U.S. natural gas production from nonconventional sources (these developments are reviewed in the last section of this chapter). The $1billion reduction in interest expense (Table 1) also enhanced cash flow. However, the financial item contributing the most to the improvement in cash flow, over $2 billion, was the accounting for deferred taxes, a somewhat technical development reviewed in the last section of this chapter. The FRS companies' long-running efforts to contain growth in debt were notably successful in 1993. Cash raised through long-term borrowing was down 10 percent, but cash used for reduction of long-term debt remained essentially unchanged (Table 6). As a result, the FRS companies' long-term debt was at its secondlowest level in nine years. Debt reduction was widespread among the FRS group, with 18 companies reporting less long-term debt on their balance sheets at the end of 1993 than at the end of 1992. Efforts to trim debt and interest payments extended to short-term debt as well. Notes payable and trade credit were reduced to a five-year low in 1993 (Appendix B, Table B9). The improvement in cash flow, together with additional funds yielded by asset sales pursuant to restructuring, was used to reduce debt rather than increase dividends or capital expenditures. Dividend payout was largely unchanged and capital expenditures were down 4 percent. Nevertheless, dividends were at historically high levels (discussed in Part II of this report) and capital expenditures continued to be the primary use of cash. Note: Sources minus Uses plus Other Investment and Financing Activities (Net) may not equal Net Change in Cash and Natural Gas Emphasis in Capital Expenditures Although the profitability of oil and gas production in 1993 was little changed from recent years (Table 3), worldwide capital expenditures allocated to this line of activity by the FRS companies were up $2 billion (Table 7).19 The upswing in capital expenditures appeared to reflect higher natural gas prices in the United States and Canada in 1993, as well as longer-term prospects for natural gas as the environmentally most benign fossil fuel and as a base for chemical feedstocks. The bulk of upstream capital expenditures cannot be separated into oil versus gas, but drilling patterns suggest a heightened interest in adding to natural gas reserves and production. In the United States, the FRS companies' gas drilling activity doubled in offshore locales (mainly the Gulf of Mexico), as measured by well completions. Onshore, FRS gas drilling reached a low point in 1987, rose in response to favorable price expectations, and then, largely due to the expected expiration of a tax credit related to drilling in nonconventional gas sources, reached a frenzied pace in 1990. The pace of FRS companies' onshore gas drilling subsequently moderated but continued on an upward path through 1993. In 1993, 16 of 22 FRS companies engaged in U.S. drilling reported an increase in onshore gas well completions. Abroad, the FRS companies' gas drilling in Canada rose nearly fivefold from 1992, to 340 completions in 1993. The surge in Canadian gas activity was driven by higher prices in 1993 and by growth in the capacity to deliver natural gas exports to the lower 48 states. Outside North America, the number of FRS companies' gas well completions was essentially unchanged between 1992 and 1993. Oil drilling by the FRS companies, while low in historical context (e.g., their 1993 worldwide oil completions were less than a third of peak value in 1984), also registered gains in North America. In the United States, oil completions were up 16 percent due to increased developmental drilling. Exploratory oil wells were nearly unchanged between 1992 and 1993. Canadian oil drilling by the FRS companies was up 66 percent in 1993. A royalty holiday for new oil wells in the province of Alberta, the locale of the vast majority of Canadian oil production, probably contributed to this upswing in drilling. Outside North America, the FRS companies' oil well completions were nearly unchanged between 1992 and 1993. Petroleum refining and marketing, both in the United States and abroad, became more prominent targets of investment for the FRS companies following the oil price collapse of 1986. In the late 1980's, petroleum demand, particularly demand for transport fuels, was propelled upward by lower prices and global economic growth. During this period and into the 1990's, the FRS companies further upgraded their refineries to produce lighter end products. Achievement of scheduled environmental quality improvements and investments to comply with provisions of the Clean Air Act Amendments of 1990 further added to downstream capital outlays. The FRS companies' capital expenditures for U.S. refining peaked at $5.2 billion in 1992, and foreign expenditures peaked at $3.6 billion in 1991. Although U.S. and foreign capital expenditures for refining and marketing in 1993 were down somewhat from the prior year (Table 7), both were high in historical context. Excluding the effects of mergers and acquisitions, the FRS companies' worldwide capital expenditures for refining and marketing of $10 billion were exceeded only by their expenditures in 1991 and 1992. The slight decline in refining and marketing capital expenditures in 1993 in part reflected downstream restructuring and the consequent the consequent reduction in investment requirements. Amoco, BP America, Coastal, and Exxon either sold or shut down U.S. refineries in 1993.20 Completion of refinery upgrading projects in late 1992 and 1993 also contributed to reduced downstream spending. For example, in 1993, Mobil put a $150-million isomerization unit into service at its Loryton, England refinery, and completed a $150million-plus upgrading of its Joliet, Illinois refinery to produce low-sulfur diesel and to lower emissions of sulfur dioxide.21 Coastal, in 1992, completed a significant upgrading of the mothballed Aruba refinery acquired from Exxon in 1989. On balance, the FRS companies' capital expenditures for worldwide petroleum (including natural gas) operations totaled $32.1 billion, slightly above the 1992 level. 19To the extent possible, capital outlays are measured by additions to investment in place, which are defined as additions to property, plant, and equipment (PP&E) plus additions to investment and advances. In 1993, additions to PP&E accounted for 94 percent of capital outlays so measured. However, because additions to investments and advances were not collected for some FRS segments prior to 1981, capital outlays are sometimes measured by additions to PP&E. Also, in comparisons with the S&P 400, this latter measure is used since the S&P 400 database does not provide an item comparable to additions to investment and advances. 20Energy Information Administration, Petroleum Supply Annual 1993, Volume 1, DOE/EIA-0340(93) (Washington, DC, June 1994), p. 122. 21Mobil Corporation, Mobil Annual Report 1993. |